For the bulls, while the loss was marginal, the narrow breadth of the market continues to signal trouble. However, the Federal Reserve finally removed some market uncertainty when it raised interest rates for the first time in six-plus years. Also, Housing Starts data and Jobless Claims beat expectations, and merger and acquisition activity remains very brisk.
For the bears, the market closed the week with its biggest two-day selloff in three months as the S&P 500 lost 3.28% on Thursday and Friday. Also, at one point, 75% of NYSE stocks were below their 200-day moving averages as commodity-related stocks continue to slump. And not just commodity stocks were hit—many other sectors such as the Transports are now down nearly 20% on the year.
The Chicago Board of Options Exchange Volatility Index (VIX) closed Friday at 20.70, which was lower by 15% for the week. This might be surprising as the market closed the week with two days of aggressive selling. However, as I noted on Friday, with Christmas and New Years coming, there will be several days when the market will be closed in the next two weeks so there’s the potential for significant volatility depression. That is, of course, if the market can stabilize.
If you would like to try to take advantage of this potential volatility crush, you can execute these short volatility trades: Buy-Writes, Bull Put Spreads, Bear Call Spreads and Iron Condors.
Events for the Week to Come
Please note the market will close at 1pm Eastern Time on Thursday and be closed all day on Friday in celebration of Christmas.
This week is full of economic data including third quarter GDP, and housing and oil data. It will be interesting to see how the week plays out because sentiment is swinging wildly. On Monday through Wednesday of last week, traders were talking about a “Santa Claus Rally” and new highs into year-end. By Thursday and Friday, the talk had turned to testing important levels to the downside.
With the holidays coming, stock and option volumes could dry up dramatically. This could either make it a very quiet couple of days, or it could be incredibly volatile if liquidity dries up and the market starts swinging wildly.
What Traders are Saying
How this challenging year will end is truly anyone’s guess. It wouldn’t shock me if leaders like Facebook, Amazon, Netflix and Google explode to new highs to end the year. Conversely, it wouldn’t shock me if traders start selling these winners in the last few days of the year.
Or traders could start buying commodity, transports and industrials, which have performed so poorly in 2015, in an attempt to front run end-of-year tax selling and rotation into these sectors in the first quarter. Or they might just continue to tank.
Regardless, this year has taught us not to overweight any one sector. Another lesson from 2015 is that, while buying the dip in the overall market has worked, buying the dip on broken stocks has been an absolute disaster.
So will these learned lessons apply to trading in 2016? Who knows! As is always the case, I will continue to be flexible and trade the current environment, not the environment behind us.
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